LONDON — It is a paradox of the digital age: Even as smartphones and high-speed Internet access become more crucial to everyday life and commerce, the makers of the equipment that underpins those networks can struggle to make money.

Cutthroat competition, particularly between the European and Chinese manufacturers that now dominate the industry, has kept network equipment costs low despite the increasingly sophisticated — and expensive — research and development that go into the technology.

That is why two of the industry’s biggest players, the Finnish company Nokia and its French-American rival, Alcatel-Lucent, are in advanced talks toward a merger that would make the combined companies the world’s second-biggest network equipment maker. Only Ericsson, of Sweden, would be larger.

The Chinese giant Huawei, whose global emergence over the last decade as a cost-cutting juggernaut has played a role in a wave of industry consolidations, would slip to third place.

Nokia announced the merger talks on Tuesday morning. Later in the day, the idea received an apparent nod of support from the French government, which has often intervened when local companies have become takeover targets for international competitors.

If completed, the deal would create a company with combined revenues of about $27 billion and might be better poised to provide telecom hardware and software to some of the world’s largest carriers, including AT&T and Verizon in the United States, Vodafone and Orange in Europe, and SoftBank in Japan.

But many of those customers have started to cut back. AT&T and SoftBank, for example, are still catching their breath after investing billions of dollars over the last decade to upgrade to the latest high-speed networks. And as the provision of network equipment has increasingly become a commodity business, manufacturers have been forced to lay off tens of thousands of employees in a bid to stay afloat.

“The industry is in need of consolidation,” said Bengt Nordstrom, co-founder of Northstream, a telecom consulting firm. “After years of growth, the telecom industry is now shrinking. A combination of Nokia and Alcatel was bound to happen at some point.”

Nokia and Alcatel-Lucent are themselves the result of consolidations. Nokia merged its telecommunications network business with that of the German industrial conglomerate Siemens in 2006, before buying out Siemens in 2013. Alcatel and Lucent — the former equipment arm of AT&T — merged in 2006, as both were struggling, and they have trod a fairly rocky path since.

But these were not always troubled companies.

In 1996, when AT&T spun off Lucent, the stock quickly became a Wall Street favorite, rising to more than $63 a share and surpassing AT&T in market value by 1998. But in 2000, Lucent was caught wrong-footed by a sudden slowdown in demand for communications equipment and reported a series of disappointing quarterly results. Its chairman and chief executive was ousted, and the Securities and Exchange Commission began an inquiry into its accounting practices. The shares slid to a low of 58 cents in 2002.

Nokia, for its part, was once the world’s largest maker of cellphones, but rapidly lost its position after the likes of Apple and Samsung entered the smartphone industry. Last year, Nokia completed the sale of its handset business to Microsoft for roughly $7.2 billion to focus on building network equipment.

“Nokia has the ambitions, and they have the cash from the Microsoft sale,” said Sylvain Fabre, a telecom analyst at the technology research company Gartner.

The companies’ chief executives — Michel Combes of Alcatel-Lucent and Rajeev Suri of Nokia — met Tuesday afternoon with President François Hollande of France at the Élysée Palace, and the office of the economy minister indicated it might support a merger.

While Alcatel-Lucent is incorporated in France, its North American operations, based around the legacy Lucent business in Murray Hill, N.J., contributed almost half of its 2014 annual revenue of 13.2 billion euros, or about $14.1 billion. Europe represented about 22 percent, and Asia just under 20 percent.

France’s previous economy minister, Arnaud Montebourg, was known for taking a critical view of deals that would lead to French companies passing under foreign control.

This time, however, the state appears to be encouraging a deal. Economy Minister Emmanuel Macron told reporters on Tuesday that combining the companies “would permit the creation of a European champion to take on Chinese competition,” though the world’s largest equipment market is Ericsson.

Mr. Macron, speaking to the news media after Mr. Hollande’s meeting with the company executives, also addressed one of the government’s main worries, saying that he did not expect any jobs to be lost in France.

Alcatel-Lucent’s French unions expressed “concern” with the prospect of a merger, in light of job losses that would most likely come with a combination of companies that each employ more than 50,000 people worldwide. They called on Mr. Macron to “be vigilant of the social and industrial consequences, notably on employment in France.”

Some analysts expressed doubts whether Nokia would be able to successfully integrate Alcatel-Lucent’s existing operations if the French government took an active role in the proposed merger.

Nokia said the companies were discussing a deal that would most likely include Nokia offering its own shares in exchange for shares of Alcatel-Lucent.

Nokia shares fell more than 4 percent in Helsinki on Tuesday, while shares of Alcatel-Lucent jumped 16 percent in Paris.

Nokia and Alcatel-Lucent had held talks before, though they stalled after the French company announced a major overhaul, including 10,000 job cuts, in late 2013.

In its latest full-year earnings, Nokia reported a marginal increase in its overall revenues, to €12.7 billion, while the company’s annual net profit rose to €3.5 billion — aided by the sale of its handset sale to Microsoft.

Alcatel-Lucent’s revenues in 2014 fell 5 percent, to €13.2 billion, and the company reported a yearly loss of €83 million due to restructuring costs.

Nokia did not say how much it could pay for its French rival. It has a market capitalization of €26.6 billion, more than double Alcatel-Lucent’s market value.

The potential tie-up would help the combined European telecom manufacturer to face the growing number of Chinese rivals, which have used their lower manufacturing costs and strength in their home market to become global telecom giants in their own right.

In particular, Huawei and another Chinese player, ZTE, have landed a number of network contracts with large Western operators.

So far, however, Chinese manufacturers — many of which have connections to the Chinese government — have been barred from selling their wares in the United States over fears that the Chinese may try to use the equipment to commit cyber warfare, such as electronic spying and network disruption.

Huawei and ZTE deny the accusations.

For Mr. Suri of Nokia, the potential takeover of Alcatel-Lucent represents the latest challenge after he successfully turned around Nokia’s struggling telecom equipment business.

Faced with significant losses at the unit, Mr. Suri, an Indian citizen who joined the company in the mid-1990s, announced 17,000 job cuts in 2011. He subsequently bought out Siemens’ stake in Nokia’s equipment business in 2013 for $2.2 billion.

After several years of cost cutting and the deal with Microsoft, Nokia now relies on its equipment unit, which represents about 85 percent of the company’s annual revenues. Like other equipment makers, the company is focusing on winning potential European contracts after analysts have predicted a slowdown in how much carriers in North American and certain Asia markets, including Japan and China, will spend on new costly equipment.

And in a sign that Mr. Suri may be further doubling down on the equipment business, Nokia is now in talks to sell its mapping business, Here, which is valued roughly $2.5 billion. Here competes with the likes of Google Maps to offer digital mapping services on people’s cellphones and in sectors like the automotive industry, according to two people with direct knowledge of the matter, who spoke on the condition of anonymity because they were not authorized to speak publicly on the matter.

Mark Scott reported from London, and David Jolly from Paris. Chad Bray contributed reporting from London.

A version of this article appears in print on , Section B, Page 3 of the New York edition with the headline: Nokia in Merger Talks as Competition Escalates. Order Reprints | Today’s Paper | Subscribe